Early Boosters of 401(k) Plans See Major Flaws Years Later

Chris Gaetano
Published Date:
Jan 4, 2017

While the 401(k) has replaced pensions as the most common way Americans save for retirement today, architects of this shift, given years to observe how the effects of their movement played out, say that the plans have major flaws and lament how things have gone, according to a piece in The Wall Street Journal.

The biggest one one, according to the human-resources executives, consultants, economists and policy experts that originally advocated for the plans, is that they simply do not provide enough money for retirement. When the plans were first proposed at major corporations, they assumed that workers would only need to squirrel away 3 percent of their paychecks because they thought that investments would grow by 7 percent a year. This, according to The Journal, turned out to be wildly optimistic, a product of sustained bull markets in the 80s and 90s that did not anticipate the subsequent recessions that could, in months, wipe out gains that took years to accumulate. 

Another, according to some of the early boosters, was that the plans were never actually meant to replace traditional pension plans but, rather, act as a supplement. However given that 401(k) plans are much cheaper for companies to maintain, traditional pensions evaporated until now only 2 percent of private sector workers actually have them, an anemic sum compared to the 33 percent who rely entirely on 401(k)s. 

Champions-turned-critics also pointed to money manager fees further eroding 401(k) savings, as well as account holders simply making foolish investment mistakes, as another reason why these plans aren't as useful as initially thought. 

All this has contributed to a growing crisis of Americans not having enough money to retire on, with Bloomberg saying that baby boomers have a median savings of about $147,000, and adding that one third of Americans don't have any employer-sponsored retirement plans at all. It did note, though, that those who do have 401(k) plans have increased the amount they put away by 10 percent over the past five years, though noted that many still fall short of the recommended salary deferments of 10 to 15 percent (though they are getting closer). However Bloomberg noted that this is likely because more companies are automatically signing their employees up for a 6 percent contribution rate, not because people are choosing to save more. 

This is, in fact, exactly one of the solutions proposed by one of the critics quoted in The Journal. Another recommended scrapping the 401(k) altogether and creating a government-run savings system run by the Social Security Administration, while another said we should consider opening up the federal government's savings plan to the general public. Regardless of what is done, though, they agree that the status quo is unacceptable with the number of U.S. households at risk of running low on retirement growing from 31 percent in 1983 to 52 percent today. 

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